Moody’s Downgrade Adds to Eli Lilly's Growing Burden

| About: Eli Lilly (LLY)

By Michael Fitzhugh

Moody’s has lowered Eli Lilly’s (NYSE:LLY) long-term credit rating, citing worries about the company’s trouble securing new drug approvals and its eroding competitive position.

The downgrade was paired with a recognition of Lilly’s strong balance sheet but adds pressure at a difficult time for the company. Investors are urging it to acquire new revenue streams to replace the expected loss of revenue from upcoming patent expirations. That’s been made worse by clinical failures and regulatory delays in getting new drugs approved.

Part of Lilly’s strategy to develop new revenue includes acquisitions, such as Avid Radiopharmaceuticals, a private Philadelphia-based molecular diagnostics company for which Lilly will pay up to $800 million. Lilly CEO John Lechleiter says the purchase “offers a potential near-term revenue opportunity” in the form of a diagnostics development platform.

But echoing the sentiment of many investors, Moody’s expressed hesitation about the company’s near-term prospects. “Recent pipeline disappointments and patent challenge setbacks compound Lilly's challenges related to upcoming patent expirations," says Michael Levesque, Moody's senior vice president.

The FDA’s October rejection of Lilly’s once-weekly diabetes medicine, Bydureon, and two recent adverse court decisions also contributed the downgrade, says Moody’s.

In July, a U.S. court invalidated patents on the company’s anti-cancer drug Gemzar. In August, a second court decision opened the way for generic competition for Lilly’s attention deficit hyperactivity disorder drug Strattera by invalidating patents protecting it.

Although it downgraded Lilly’s senior unsecured debt to A2 from A1, Moody’s affirmed Lilly's Prime-1 short-term rating, which was not under review.

The ratings agency also identified positive factors reflected in its new rating of the company, including “a strong balance sheet and conservative financial profile, the recent FDA approval of Cymbalta in chronic pain, and a good outlook for sales growth outside the U.S.”

Moody’s new rating follows a November 3 report by Fitch Ratings, which reiterated its A+ rating on Lilly’s senior unsecured debt.